Clean-Cut Prestige

Seven cultivation locations operating under the Applegate Valley Organics brand supply a large percentage of the flower in Nectar’s retail stores.

Early medical marijuana dispensaries established a well-known stereotype of seedy, hole-in-the-wall retail shops designed to fly under the radar of law enforcement.

That image is exactly the vibe that Nectar, an Oregon-based marijuana retail chain, wanted to avoid when it opened its doors in 2014. After all, if the industry wants to be respectable, it needs to look the part, says Devra Karlebach, the company’s chief operating officer.

“Most dispensaries back then were dirty and dark — you felt like you were part of an illegal drug deal,” Karlebach says. “We wanted to do things differently. So, we spent a lot of money to make everything nice, upfront and clean. We wanted to take medical marijuana out of the back room and into the light. And that’s how we built our company.”

With that goal in mind, the company opened its first dispensary in Portland’s upscale Pearl District. The chic space boasted a clean, open feel and showcased well-lit product displays.

During one stretch of 2016, nearly one-fifth of Oregon’s cardholders shopped at a Nectar dispensary.

Oregon Standoff

Testing regulations, licensing woes stall industry growth

By Garrett Rudolph

After months of outpacing tax revenue projections from the state, Oregon’s cannabis industry hit a snag with the implementation of new packaging and testing regulations that took effect on Oct. 1, 2016.

According to analysis of retail sales by BDS Analytics, edibles suffered the greatest impact with a 32% sales decline from September to October.

Across-the-board drop-offs have challenged hundreds of businesses as they attempt to transition from medical to recreational. On Jan. 1, state regulations halted the early start program that allowed licensed medical dispensaries to sell to all adults.

Among other findings from BDS Analytics:

– Total dispensary sales declined 8.5% from September to October (down to $29.5 million);

– From September to November, same-store sales declined an average of 21%.

– October was the lowest month for marijuana sales since May 2016.

Many have pointed to a lack of certified testing labs and the strict quality assurance regulations that have choked off the industry. In December, the Oregon Health Authority released updated rules that essentially allow larger batches to be tested, with the intention of freeing some of the blockage.

Meanwhile, Portland businesses have faced an extreme bottleneck with the city’s dual licensing requirement (cannabis businesses must receive a license from both the city of Portland and the Oregon Liquor Control Commission).

According to economist Beau Whitney of Whitney Economics, only 19 recreational licenses have been issued out of 355 applications.

“It seems ironic that, given the number of cannabis businesses in Portland and the Office of Neighborhood Involvement’s stated goal of partnering with businesses to promote economic activity, the lack of licenses would indicate that Portland is one of the state’s least cannabis-friendly cities,” Whitney said in a press release.

He projected the slow licensing process had cost Portland marijuana businesses more than $22 million in lost revenues each month.

Oregon legalized recreational cannabis the same year, and Nectar began a rapid expansion, capitalizing on its clean-cut prestige.

Within two years, Nectar has become one of Oregon’s largest marijuana retail chains with seven locations — four in Portland and one each in Tillamook, Eugene and Gresham. When the Oregon Liquor Control Commission began licensing recreational marijuana shops, Nectar received five of the first 26 licenses.

Nectar was originally founded in 2013 by two men from Nebraska — Jeremy Pratt and Jeff Johnson — who moved to Oregon specifically to get into the cannabis business.

Pratt, the company CEO, had a background in consumer retail. Karlebach attributes this to much of the company’s success.

“He’s a real visionary,” Karlebach says. “He has an innate knowledge of the cannabis market. I’ve never seen somebody understand the market that well.”

She says Pratt’s keen grasp of where the industry is heading gives him the ability to strategize accordingly.

Budtender Jesse Lee opens a jar for a customer to inspect the product

Nectar stocks its stores heavily with its own line of cannabis — Applegate Valley Organics — grown primarily outdoors in Southern Oregon’s rich marijuana farmland. Plus, two greenhouse facilities allow the company to grow year-round. Applegate Valley Organics cultivates about 18,000 plants annually at its seven different grow locations, which supply 75% of Nectar’s flower. Extracts, concentrates and edibles are primarily outsourced. To stock these products, the company works with a host of small, local vendors, including Grön Chocolate, a growing Portland artisanal maker of infused chocolate bars.

“They’ve played a big part in our success, no doubt,” Grön owner Christine Smith says. “We’re a multi-million-dollar little chocolate company now. They’ve done a really great job of capturing the marketplace. They’ve got a fabulous brand of their own and as a vendor they’re also fabulous to work with.”

Yet it wasn’t always smooth sailing. Nectar had to overcome a number of hurdles in the beginning, due to the cannabis industry’s often chaotic regulatory environment. For example, about two months after opening the first store, Nectar hit a snag when a school opened nearby. The company opted to move to a new location in East Portland.

An employee rides a tractor to get a better view of the garden.

“We try to do things the right way, so when the state government asked us to move, it just made more sense to say okay and do what they wanted,” Karlebach says. “I’ve learned long ago, don’t pick a fight with an agency or a governing body. It’s not worth it.”

That attitude became part of the company’s strategy.

More recently, Nectar encountered another similar problem. Its new location was licensed and approved by the Oregon Health Authority, but the Office of Neighborhood Involvement — a non-regulating agency — asked Nectar to shut down the store. Rather than fighting, the company closed the location last September, reassigning 20 workers to its other seven stores.

“The ironic part is that property is actually being rezoned in the next year, so we’re waiting to see what happens with it,” Karlebach says. “So, we effectively should have already been at eight stores, but we’re back to seven for now.”

Dealing with those issues, however, was good practice for the company’s biggest challenge yet — transitioning stores into the state’s new recreational cannabis system. It’s a process that involves dealing with two primary regulatory agencies — Oregon Health Authority and the OLCC — and has required a great deal of patience.

“There’s a lot of ambiguity still in terms of what the agencies want from us, but we’re doing our best,” Karlebach says.

Nectar was one of the first companies in Oregon to be approved for recreational sales. However, switching from medical sales to recreational required a complex sense of timing.

After recreational legalization, medical dispensaries in Oregon were allowed to sell limited amounts of cannabis to recreational customers under the state’s early start program, which expired Jan. 1, 2016. Hundreds of dispensaries that had been selling to both medical and recreational customers are now limited to serving only cardholding patients unless they’re licensed by the OLCC.

Jesse Lee, a budtender at Nectar’s Gresham location.

Additionally, companies in the new recreational market must have their products tested by state-approved laboratories under what may be the strictest testing regulations in the country for cannabis. So far, only a few labs have ramped up to meet the new standards.

The complicated approval process has caused a bottleneck for recreational sales because there aren’t enough labs yet to test samples for the new market.

“The recreational requirements have created a tremendous backlog,” Karlebach says. “If we flipped all our stores right away, we’d only have about three days worth of product.”

By early November, Nectar had transitioned two of its stores to recreational sales, with a goal of transitioning the others around the start of the new year. Before doing so, the company had to verify it would have enough product to justify keeping those stores open, Karleback says.

“If I flip the switch too early, I would be cutting off the market, and we’d have no edibles, concentrates or extracts,” Karlebach says. “I think the state, in its quest to ensure that everyone is licensed, is doing its best. It’s just taking some time.”

Nectar continues to provide marijuana for medical patients, which requires additional oversight from the OLCC and Oregon Health Authority. Although that requires a lot of paperwork and fees, Karleback says it’s important to continue to provide services for medical marijuana patients. About 19% of Oregon’s medical patients bought products from Nectar during one stretch of 2016, according to the company’s analysis of unique medical transactions and quarterly reports published by the Oregon Health Authority.

“We do a tremendous medical business,” Karlebach says. “It’s challenging to do both, and we’ve had to switch to Flowhub, a new point-of-sale system, to do that, but we want to be able to serve both markets.”

The company has garnered a reputation that even its competitors respect.

“They’re a great company,” says Brad Zusman, owner of Canna-Daddy’s, a competing Portland retailer. “I think their strength is really knowing the market. They’ve done very well with pricing and volume purchasing. They’re all about branding, bringing brands in and seeing the future of the industry.”

Nectar budtender Devin Meyers rings up customer Gideon Francisco.

Amy Margolis, a Portland attorney and founder of the Oregon Cannabis Growers political action committee, says she thinks Nectar has been ahead of its competition in working with regulating bodies to meet the requirements of both markets.

“They’re managing the transition really well,” Margolis says. “They’re well capitalized, they’ve been smart with their growth and progressive with their growth. Nobody’s having an easy time in the transition. Businesses are successful because they’re nimble — and Nectar has done a very good job of being nimble.”

Currently, the company has about 150 employees on the retail side and another 50 involved with cultivation at its Applegate Valley farms. But Nectar is far from done with its expansion plans.

“Our goal is to open 20 new stores next year,” Karlebach says. “Even if we achieve half of that goal, we’ll be doing great.”

Eventually, Nectar also wants to expand into other legal states.

“We have strategic partners in Michigan, Maryland and Colorado that we’re working with, and we’ll be looking at opening in those states under the Nectar brand,” Karlebach says, adding that Nevada, Florida and Ohio may also be on the company’s list in the future.

“There’s a lot of nuances in these specific states that make us want to see if a few things shake out first,” she says.




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